Navigating Cayman’s VASP Act Amendments

On 13 February 2024, the Cayman Island’s Ministry for Financial Services (MFS) issued their long-awaited Virtual Asset (Service Provider) Act (VASP Act) amendments for consultation. This is a significant milestone because it signals that “Phase 2” of VASP Act implementation is on its way. The Cayman Islands VASP Act was passed in May 2020, with certain provisions commenced in October 2020 and January 2021. The commencement of these provisions signified the implementation of “Phase 1”, which was an anti-money laundering (AML), combating the financing of terrorism (CFT) and cybersecurity-focused registration regime.

Phase 2 of the VASP Act includes a licensing regime for virtual asset trading platforms and custodians, an issuance approval regime for virtual asset issuers and a sandbox regime for testing innovative financial technologies. It remains to be seen whether all the remaining provisions of the VASP Act will be commenced, but the MFS has signalled that the licensing regime for trading platforms and custodians will begin once the amendments are finalised.

This article delves into some of the significant revisions, additions and omissions in the proposed amendments.

Amendment of the definition of “owner” or “operator”

Virtual asset trading platforms will be required to be licensed when the Act amendments come into force. This obligation applies to the “owner” or “operator” of the trading platform. The proposed amendment to the Owner/Operator definition is intended to extend licensing obligations to trading platforms that may not have a clearly identifiable group managing the platform, such as decentralised autonomous organisations (DAOs). In order to achieve this, the definition has been amended to include (a) an entity under which a platform operates; (b) an entity under which a platform may contract with third parties; or (c) the entity or group that provides the services offered by the platform to the users of the platform.

While the MFS’s intention is clear, the trading platform regime, including the rules and guidance for trading platforms published for comment by the Cayman Islands Monetary Authority (CIMA), may not be well suited for DeFi protocols.

Transition Periods

Currently, 20 VASPs are registered with CIMA, with 6 offering trading platform services and 10 offering custody services. The proposed amendments only provide 30 days from the commencement of the amended Act for these firms to prepare and submit their licensing applications. This is significantly less time than will be necessary for firms to review the final Amendments and prepare applications.

Enforcement Powers – Policing the Perimeter

The proposed Act amendments significantly expand the powers of CIMA to take action against firms it reasonably believes are carrying on unauthorised virtual asset services, empowering CIMA to have access to any book records and documents but also “access to any cash, virtual assets and securities”. Suffice it to say this proposed amendment should be of concern to any firms that are operating on an unregulated basis in the virtual asset space or are uncertain of their regulatory status.

Licensing Application

The proposed amendments to the VASP regulations include the licensing application requirements. These are generally consistent with the current registration application requirements but include custodian-specific requirements relating to safeguarding of client assets, client agreements and insurance arrangements. It also includes trading platform-specific requirements relating to prop trading, conflicts of interest, market surveillance, clearing and settlement, and listing policies.

Fees

The fees for custodians and trading platforms are also included in the proposed amendments to the regulations. For custodians, the yearly licence fee will be CI $30,000 for firms generating up to CI $1,000,000 in revenues and CI $60,000 for firms with higher revenues. Trading platform fees will be CI $100,000 for firms generating up to CI $10,000,000 in revenues and CI $200,000 for firms with higher revenues. These fees are generally consistent with fee ranges in force or proposed in other jurisdictions. In the Caribbean, for example, they are lower than Bermuda but higher than the Bahamas.

It will be essential to clarify that trading platforms that offer custody services are not required to pay both licensing fees.

What’s Missing?

The proposed amendments have not addressed some key elements of the VASP Act’s implementation. Importantly, there is no indication that the virtual asset issuance regime will be implemented as part of Phase 2. This would be a major missed opportunity for the jurisdiction. Tokenisation projects could become a pillar of evolving markets, and the Cayman Islands would be extremely well-placed as an international hub for tokenised securities and real-world assets. There is also no indication that the Sandbox regime will be implemented at this stage, which would encourage cutting-edge projects to consider the Cayman Islands. Finally, crypto asset derivatives should explicitly be brought within the VASP trading platform regime, as the Securities Investment Business Act does not include trading platform requirements.

Conclusion

The proposed VASP Act amendments are a welcome and long-awaited step toward full implementation of the VASP Act and associated regulatory clarity and certainty. Several significant proposed amendments could be adjusted to enhance the attractiveness of the Cayman Islands regime without sacrificing regulatory safeguards. Further, there are a number of additional steps that could be taken to create an internationally leading VASP regime.

On 7 March, in response to industry input, the MFS announced that the consultation period has been extended to 3 April. XReg encourages all market participants with an interest in the Cayman Islands VASP regime to submit comments through the GitHub Consultation site. Please reach out to XReg at contact@xreg.consulting for assistance in your comment responses or to discuss the implications of the amendments for your business.